(normal profit= zero econ. profit) Long-Run Competitive Equilibrium Allocatively & Productively Efficient P MC ATC Price P MR TR = TC P = ATC Price = MC = Minimum ATC (normal profit= zero econ. profit) Q Q Quantity

Pure Monopoly CHAPTER TWENTY-FOUR

Four Market Models Pure Monopoly Market Structure Continuum Pure Competition Market Structure Continuum

Advertising to increase demand Characteristics of Monopoly Single Seller No Close Substitutes “Price Maker” Blocked Entry Advertising to increase demand

Barriers to Entry Economies of Scale Legal Barriers: Patents & Licenses Ownership of Essential Resources Monopolies are relatively rare There are times when monopoly is desired

The Natural Monopoly Case Economies of Scale: The Natural Monopoly Case $20 15 Average Total Cost 10 50 100 200 Quantity

The Natural Monopoly Case Economies of Scale: The Natural Monopoly Case $20 15 ATC The most significant barrier to entry is economies of scale. Firms that are big enough to continue expanding to keep costs low. In fact a natural monopoly in this case should be encouraged. Average Total Cost 10 50 100 200 Quantity

The Natural Monopoly Case Economies of Scale: The Natural Monopoly Case $20 15 ATC Average Total Cost 10 If ATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly 50 100 200 Quantity

Monopoly Demand Price Exceeds Marginal Revenue example... The firm that operates as a monopoly encounters a downward sloping demand. The demand curve is the market demand. The monopolist can only increase sales by charging a lower price. Price Exceeds Marginal Revenue example...

Price & Marginal Revenue Under Monopoly As price decreases from $142 to $132... $142 132 D Q 1 2 3 4 5 6

Price & Marginal Revenue Under Monopoly As price decreases from $142 to $132... Revenue losses occur $142 132 Loss = $30 D Q 1 2 3 4 5 6

Price & Marginal Revenue Under Monopoly As price decreases from $142 to $132... but revenue will increase with the additional units sold $142 132 Loss = $30 Or subtract the total revenue at the price of $142 and quantity of 3= (426) from the total revenue of 4 units sold at a price of 132 =528. MR=102 at output of 4. D Gain = $132 Q 1 2 3 4 5 6

Price & Marginal Revenue Under Monopoly As price decreases from $142 to $132... but revenue will increase with the additional units sold $142 132 Loss = $30 Marginal revenue will necessarily be less than price D Gain = $132 Q 1 2 3 4 5 6

Demand, Marginal Revenue, Total Revenue Imperfectly Competitive Firm 200 150 50 Elastic Dollars Inelastic MR D Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 750 500 250 Dollars TR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Demand, Marginal Revenue, Total Revenue Imperfectly Competitive Firm 200 150 50 Elastic Dollars Inelastic MR D Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 750 500 250 Dollars TR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Demand, Marginal Revenue, Total Revenue Imperfectly Competitive Firm 200 150 50 Elastic Unit Dollars Inelastic D MR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Eat Up Idiots!! 750 500 250 Dollars TR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Output and Price Determination Cost Data – the monopolist hires resources competitively in the factor market and so the cost curves will be similar to Pure Competition.

Output and Price Determination Cost Data MR = MC Rule – This will be the same profit maximizing point.

Output and Price Determination Cost Data MR = MC Rule No Monopoly Supply Curve – There is no set P/Q combinations as in Pure Competition. The price the monopolist is able to charge depends on the elasticity of demand at that quantity.

Output and Price Determination Cost Data MR = MC Rule No Monopoly Supply Curve Firm is the Industry

Output and Price Determination Cost Data MR = MC Rule No Monopoly Supply Curve Firm is the Industry Firm is a Price Searcher/Maker

Output and Price Determination Cost Data MR = MC Rule No Monopoly Supply Curve Firm is the Industry Firm is a Price Searcher/Maker Monopoly Pricing Misconceptions Not Highest Price - seeks maximum profit not maximum price.

Profit Maximization Under Monopoly 200 175 150 125 100 75 50 25 Q 0 1 2 3 4 5 6 7 8 9 10

Profit Maximization Under Monopoly 200 175 150 125 100 75 50 25 D Q 0 1 2 3 4 5 6 7 8 9 10

Profit Maximization Under Monopoly 200 175 150 125 100 75 50 25 D MR Q 0 1 2 3 4 5 6 7 8 9 10

Profit Maximization Under Monopoly 200 175 150 125 100 75 50 25 MC $122 D MR Q 0 1 2 3 4 5 6 7 8 9 10

Profit Maximization Under Monopoly 200 175 150 125 100 75 50 25 MC $122 ATC D MR Q 0 1 2 3 4 5 6 7 8 9 10

Profit Maximization Under Monopoly 200 175 150 125 100 75 50 25 MC $122 Econ. Profit ATC $94 D MR Q 0 1 2 3 4 5 6 7 8 9 10

Profit Maximization Under Monopoly 200 175 150 125 100 75 50 25 MC Profit Per Unit $122 Econ. Profit ATC $94 D Competitive Price MR = MC MR Q 0 1 2 3 4 5 6 7 8 9 10

Loss Minimization Under Monopoly 200 175 150 125 100 75 50 25 Loss Per Unit MC ATC Loss AVC D MR = MC MR Q 0 1 2 3 4 5 6 7 8 9 10

Profit Maximization Under Monopoly S = MC Monopolist will sell less units at a higher price than in competition Pm Pc D MR Q Qm Qc

Price Discrimination 1 - Monopoly Power 2 - Market Segregation Conditions... 1 - Monopoly Power 2 - Market Segregation 3 - No Resale Consequences... 1 - More Profits 2 - More Production

Single Price Vs. Price Discrimination MC P ATC Price and Costs D MR Q Q1

Single Price Vs. Price Discrimination MC P Profits with a single price ATC Price and Costs D MR Q Q1

Single Price Vs. Price Discrimination Profits with price discrimination MC = S P ATC Price and Costs D = MR Q Q1 Q2

Regulated Monopoly P Price and Costs ATC MC D MR Q

Socially Optimum Price Regulated Monopoly P Socially Optimum Price Price = MC Price and Costs ATC MC D MR Q

Regulated Monopoly Fair Return Price Price = ATC P Price and Costs ATC MC D MR Q

Unregulated Monopoly Price MR = MC Price and Costs ATC MC D MR Q

TR = TC $36 = $36 TP=$8 TR=$32 TC=$24 4 $8 $8 $6 $32 $24 $8 – $6 = $2 $32 – $24 = $8 P=$6 Q=6

Natural Monopoly P Unregulated Monopolists Price P @ Profit max MC Dead Weight Loss Dead Weight Loss P = ATC ATC P = MC Q Q Q Q Darp MR